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Monday, March 7, 2016

What if we stop spending.

It might seems strange but apparently this is what is happening in Europe lately, despite the cost of borrowing has never been so cheap consumers are not buying anymore or at least not enough to continue feeding growth.
That's a real problem for the brainy professors in Frankfurt and we're all waiting to see what they will pull out of the hat this time in order to give some relief to markets and confidence to consumers; their solution will probably disappoint markets and we will assist in a big drop in indexes witch is not too bad for all the investors who bided their time in 2015 waiting for a good opportunity to enter the market. Money has never been so cheap but people is not borrowing anymore or maybe the ones that would like to borrow don't have an adequate income to sustain a loan or a mortgage; billions of Euro are thrown on financial markets every month by the ECB (and more will probably flow into markets after the March ECB meeting) with the result of sending to negative interests sovereign bonds that just 5 years ago where considerate almost junk.
Spanish and Italian bonds recently reached the club of negative interest and investors have to look further if they want to get a return on their investments, we are talking about bonds that will get to maturity in 7 or 10 years to get a return of 3 to 5 % on capital. Despite this unimagined abundance of money, all this liquidity doesn't make it to the real economy and it remains trapped in between banks; it is like the ECB keeps feeding the cow, but the cow is not hungry anymore.

There's no real safe heaven nowadays; what was considerate safe investments in the past has proven to be the worst nightmare for investors after Lehman Brothers and the following collapse of the economy, first was real estate followed by gold and lately even diamonds lost their appeal. On the other side, after a drop that lasted two years, gold has shown to be the most profitable asset of 2016 so far.
What are all the talking heads saying and what where they predicting after the stellar 2015 we just had? Basically they where all wrong; when the price of crude oil dropped below 30 $ a barrel the wealthiest sovereign funds started pulling their money out of financial markets and world indexes dropped double digits.
Banks in Europe are facing new rules and their role of market maker, is coming to an end at least for the smaller ones and the result is an increase of volatility investors where not used to.
" The big winners of 2015 became losers in the first weeks of 2016 and the most hated stocks and sectors of 2015 are outperformers now. Mining is the sector that is giving a 10 % return so far this year" (The Wall Street Journal, March 1st, 2016, pages B5 and B7, The Worst Market: One without a story by James Mackintosh).

What shall the average investor do in this kind of environment? Keep a cold head, have nerves of steel and be prepared to suffer temporary losses when looking at his portfolio (a loss is not a loss till you get rid of the loosing stock at a lower than purchased price) and maybe rethink the entire portfolio re balancing investments toward less volatile assets. A good opportunity might be total return funds, those that massively use CFD and ETF in order to make a return even when quotations are heading south but remember, there's no free ride in markets and more profits most of the times means more risks so be prepared to big swings in markets and keep your positions. Most money managers are increasing the percentage of cash in their portfolio but it wont last long; sooner or later, they will have to invest their pile of money since that is what they are paid for and by investing money profitably they get their fat bonus checks at the end of the year.